Birchington Medical Centre, CT7 9HQ

To: Investment Committee 14 May 2018

Executive summary

Acquisition type Standing investment Purchase price £3,327,000 NIY 4.2% (4.75% - March 2019) EY 5.06% Title Freehold Construction Purpose built 2003 GMS lease 27 years w.e.f. 15th March 2002, TIR lease with 3-

yearly, upward only OMR reviews. Tenant break in 2022.

GMS rent £117,000 Pharmacy lease 19-year lease co-terminus with medical centre,

OMV rent reviews which are set to change to RPI upon acquisition

Pharmacy rent £36,500 WAULT 11 years (4 years to break) Rental growth Good prospects, in light of the expansion space as

well as outstanding rent reviews IRR 5.00% Savills valuation £3,015,000 Savills NIY 4.73%

General The property is situated in Birchington-on-Sea, a village in North East Kent, approximately 5 miles west of Margate and 7 miles north west of Ramsgate.

The property is of ‘barn-style’ construction, brick built and timber clad, occupying a large plot of just over an acre. The medical centre extends to 605m2 and the pharmacy 114m2. 45 car parking spaces are provided. An additional 98m2 of ‘expansion space’ has been fitted out and is now occupied for GMS purposes, expected to be rentalised imminently as mentioned below.

The surgery serves 8,894 patients and has 3 GP Partners. Built in 2009, the building is in good condition both internally and externally.

CQC and local health economy

NHS Thanet CCG published their Estates Strategy Plan in January 2015 and their Primary Care Strategy identified a number of national and local issues affecting the delivery of primary care, such as the following:

- Health inequalities worse than the national average - A number of practice closures with more expected - Workforce issues with an estimated 16.5 GP WTE vacancies - Premises issues with 9 practices rated as red or amber in terms of

condition, highlighting the need for premises investment

Birchington Medical Centre is deemed to be of high importance within the strategic plan, given the planned housing of over 1,000 units be 2020.

The surgery received their CQC rating in November 2015 and received an overall rating of Good.

The following table outlines the nearest surgeries to Birchington Medical Centre:

Surgery Distance Premises List NHS

Rating Birchington Medical Centre - PB 8,894 50.9% Westgate Surgery 1.8 PB (v.

small) 10,125 86.4%

Dr Crosfield C E & Partners 2.4 ? 8,383 89.4% Minster Surgery 3.0 PB 8,383 89.4% The Limes Medical Centre 3.9 PB

(murphy) 15,929 55.0%

Northdown Surgery 4.7 PB (small, merging

Bethesda)

9,994 63.6%

Newington Road Surgery 5.0 PB 7,893 64.2% Summerhill Surgery 5.1 Resi.

Conv. 6,259 41.6%

Bethesda Medical Centre 5.2 PB (murphy)

19,344 65.4%

Mocketts Wood Surgery 5.2 PB 8,969 98.6%

*NHS Rating – Amongst the best/middle range/amongst the worst

https://www.nhs.uk/Services/GP/Overview/DefaultView.aspx?id=43242https://www.nhs.uk/Services/GP/Overview/DefaultView.aspx?id=44386https://www.nhs.uk/Services/GP/Overview/DefaultView.aspx?id=36781https://www.nhs.uk/Services/GP/Overview/DefaultView.aspx?id=36087https://www.nhs.uk/Services/GP/Overview/DefaultView.aspx?id=42272https://www.nhs.uk/Services/GP/Overview/DefaultView.aspx?id=36062https://www.nhs.uk/Services/GP/Overview/DefaultView.aspx?id=37059https://www.nhs.uk/Services/GP/Overview/DefaultView.aspx?id=39092https://www.nhs.uk/Services/GP/Overview/DefaultView.aspx?id=40116https://www.nhs.uk/Services/GP/Overview/DefaultView.aspx?id=35788

Financial appraisal

The practice appears to be struggling to maintain its patient numbers with a slow but steady decline occurring in patient numbers over the past 3 years. Overall the patient numbers have decreased 2.7% in that period to 8,900 patients. Payments from the NHS have been on the increase in that which has resulted in £167 per patient. The patient density is 14.8 patients per square metre which suggests that the practice could accommodate more patients. With the planned housing development in Birchington, we expect patient numbers to increase again within the next couple of years.

Tenancy details

Medical Centre

The medical centre is let to Dr Eddington & Partners on a 27-year IRI lease from 15th March 2002 at a current rent of £117,000, with a tenant break at 2022. The rent reviews are 3 yearly and upward only. Although IRI, the tenant is responsible for the majority of external services, limiting the landlord’s remit and exposure to costs. It should be noted that there is no requirement for a minimum number of GPs to remain upon assignment.

There is a supplementary lease over the expansion space, fully occupied by the GPs at a nominal £1 rent until expiry of the abatement period, which we understand to be 2018. Whilst we have not had sight of any NHS correspondence confirming the abated rent, we understand this to be at least £17,500 based on the same rent per m2 as the original GMS space. The GPs are under a ‘best endeavours’ obligation to secure the reimbursement on this area and we propose to instigate this at the earliest opportunity. A minimum of 3 GPs are required on assignment under this lease.

The pharmacy is let to Canterbury Pharmacies Ltd, a Paydens subsidiary. The current rent is £36,500 and follows a 3 yearly OMV upward only pattern, which is currently overrented (£4.09pp), although scripts per patient are above average (25.5). The rent review mechanism is to change to RPI upon completion which at 2%pa will run to £55,322pa by the end of the term.

Acquisition assumptions and growth

The current GMS rent equates to £175/m2 with no reviews implemented since 2011, so we expect to see reasonable growth at the next review, in addition to the rent for the expansion space.

Whilst the pharmacy is overrented, this will change to RPI upon acquisition, therefore generating steady growth.

IRR

Based on the proposed purchase price and the following assumptions the asset shows an IRR of 5.00%.

Assumptions

10 - year period This will allow for a restructure of the lease for a term of 15 years (due to housing pressures). In addition, the rent for the expansion space, can be factored in and an exit assuming a 10-year unexpired term.

Rental growth on a per tenant basis Factoring in the additional rent for the expansion space and 2% RPI growth on the pharmacy. We have assumed a 1% pa increase in the GMS space rent.

Exit yield 5.25% NIY Based on an unexpired term of 10 years, assuming the break has not been activated

Vendors fees of 1% on exit

Alternative use

Given the planned housing development, we are confident that this property is fundamental to the provision of health care services in the long term.

REPORT Discounted Cashflow

Address Birchington Medical Centre,Minnis Road,Birchington,Kent,CT7 9HQDCF Start Date 06-Mar-2018

Assumptions

Equity Owned 100.00%Duration 10 years Discounting Monthly

ERV Growth set up using tenant growth rates

Exit Basis: OverrideExit Method: Initial YieldExit Tables: Annually In Arrears

Cashflow Results

Start: Gross Value £3,535,783 Geared IRR 5.0277%Start: Acquisition Fee @ 6.4838% -£215,293 Ungeared IRR 5.0277%Start: Net Value £3,320,490

Exit Results

Exit: Gross Value £3,703,885Exit: Capital Expenditure £0Exit: Purch.Fees -£201,807Exit: Net Value £3,502,078Exit: Vendors Fees -£52,531Exit: Rent adjustments -£10,464Exit: Adjusted Net Value £3,439,083

Exit: Rent payable (gross) £200,468 Exit: Market rent (gross) £188,630Exit: Rent receivable (net) £194,454 Exit: Market rent (net) £182,616 (Gross market rent minus revenue costs and heads rents paid at exit)

Exit: Net Init Yield 5.2500% (Net Rent / Gross Value X 100) Exit: Gross Initial Yield 5.5525% (Net Rent / Net Value X 100)Exit: Net Revn Yield 4.9304% (Net ERV / Gross Value X 100) Exit: Gross Revn Yield 5.2145% (Net ERV / Net Value X 100)

5.0928% (Gross ERV / Gross Value X 100) 5.3862% (Gross ERV / Net Value X 100)Exit: Equivalent Yield 5.1018%Exit: Vendors Fees 1.5000% (-£52,531)Exit: Purch Costs 5.7625% (-£201,807)

Item Start End Period Total Rent Grd Rent ERV Costs Interest PV factor NPV

1 06-Mar-2018 05-Mar-2019 -£3,377,212 £163,177 £0 £173,724 -£4,605 £0 1.0000 -£3,379,989 2 06-Mar-2019 05-Mar-2020 £168,524 £173,726 £0 £175,148 -£5,202 £0 0.9350 £157,569 3 06-Mar-2020 05-Mar-2021 £178,772 £183,975 £0 £176,587 -£5,203 £0 0.8903 £159,154

ARGUS Valuation - Capitalisation 2.50.079 11-May-2018 Page 1

Appendix 1

REPORT Discounted Cashflow

Address Birchington Medical Centre,Minnis Road,Birchington,Kent,CT7 9HQDCF Start Date 06-Mar-2018

Item Start End Period Total Rent Grd Rent ERV Costs Interest PV factor NPV

4 06-Mar-2021 05-Mar-2022 £178,877 £184,397 £0 £178,041 -£5,519 £0 0.8476 £151,618 5 06-Mar-2022 05-Mar-2023 £181,325 £186,915 £0 £179,509 -£5,590 £0 0.8071 £146,340 6 06-Mar-2023 05-Mar-2024 £185,141 £190,747 £0 £180,991 -£5,606 £0 0.7684 £142,270 7 06-Mar-2024 05-Mar-2025 £185,472 £191,194 £0 £182,489 -£5,722 £0 0.7316 £135,690 8 06-Mar-2025 05-Mar-2026 £188,051 £193,849 £0 £184,002 -£5,798 £0 0.6966 £131,001 9 06-Mar-2026 05-Mar-2027 £191,984 £197,798 £0 £185,529 -£5,814 £0 0.6633 £127,340 10 06-Mar-2027 05-Mar-2028 £192,341 £198,275 £0 £187,072 -£5,934 £0 0.6315 £121,464 11 06-Mar-2028 Final period £3,439,083 £188,630 0.6128 £2,107,558 PV factor is averaged over multi-discount dates.

NPV Balance £15

DCF Exit calculations

Tenant Gross Rent Net Rent Gross ERV Net ERV Gross Valuation Equity

GP Extension Abatement £18,798 £18,234 £19,330 £18,766 £347,315 100.00% Dr Eddington & Partners £135,379 £131,318 £138,066 £134,005 £2,501,288 100.00% Canterbury Pharmacy Ltd £46,291 £44,902 £31,234 £29,845 £855,281 100.00%

Sum of tenant gross values £200,468 £194,454 £188,630 £182,616 £3,703,885 100.00%

ARGUS Valuation - Capitalisation 2.50.079 11-May-2018 Page 2

Appendix 1

Appendix 2

A Birchington Medical Centre B Westgate Surgery C Dr Crosfield C E & Partners D Minster Surgery E The Limes Medical Centre F Northdown Surgery G Newington Road Surgery H Summerhill Surgery I Bethesda Medical Centre J Mocketts Wood Surgery

Appendix 3

-2.70% 24.51%167.43£ 14.75 10.27% GMS

Birchington Medical Centre

Rent % Income Contract TypePayments per patient

Payments trendPatient density

List trend

8,116

10,084

8,924

7,000

7,500

8,000

8,500

9,000

9,500

10,000

10,500

J U L - 1 5 J A N - 1 6 A U G - 1 6 F E B - 1 7 S E P - 1 7 M A R - 1 8

LIST SIZE

NHS Assura Birchington MC

1,047,506

1,485,441 1,494,151

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

NHS Assura Birchington MC

NHS PAYMENTS

FY15 FY16 FY17

£- £50 £100 £150 £200 £250 £300 £350

PAYMENTS PER PATIENT

£167

- 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00 50.00 55.00

Patients per square metre

PATIENT DENSITY

14.75

Appendix 4

Birchington - IC paperBirchington IRR App 12 - Birchington Medical Centre Location Plan App 22 - Birchington Medical Centre NHS Plan App 3Birchington Medical Centre App 4